Osaka’s allure increases

Putting all eggs in Tokyo basket starting to look overly risky to firms

by Aki Ito and Kathleen Chu

Bloomberg

Japanese companies may rethink their century-long trend of concentrating resources in Tokyo after the nation’s record earthquake crimped power supply to the capital and radiation concern spurred some residents to flee.

Production hubs in Japan should be shifted to the western part of the country and away from the Tokyo region to minimize disruptions to the country’s supply chain, Masamitsu Sakurai, head of the Japan Association of Corporate Executives, the nation’s second-largest business lobby, said in Tokyo on Tuesday.

A shift in offices to Osaka and its Kansai hinterland would benefit an area that was for centuries Japan’s commercial center.

Itochu Corp., an Osaka-based trading company, said it may move some people out of Tokyo and companies from Servcorp Ltd., an office-lease and management firm, to recruiter Robert Walters PLC anticipate a pickup in business in the city.

“People may start to think it’s better to disperse their risks, that it’s better not to put all your eggs in one basket,” Hideo Hayakawa, the Bank of Japan’s Osaka branch chief, said in an interview last week. “These completely unanticipated threats will continue to hit us, as was the case with the tsunami and the nuclear power plant this time.”

Tokyo’s dominant energy supplier, Tokyo Electric Power Co., lost 40 percent of its generating capacity in the March 11 disaster that triggered the worst nuclear crisis since Chernobyl in 1986. The shortage has highlighted the risks in a capital area that accounts for one-third of the economy.

At the same time, western Japan has unused capacity that cannot be transferred, because the two regions are incompatible due to a historical quirk. Eastern Japan runs on a 50-hertz current and the rest on 60 hertz. The government is in talks with utilities to channel more from the west to the east.

The Nikkei 225 stock average has lost almost 7 percent since the 9.0-magnitude quake and subsequent tsunami devastated the northeast and left more than 28,000 people dead or missing.

Supply chain disruptions have caused companies from Sony Corp. to Toyota Motor Corp. to shut operations even outside the disaster zone. That’s magnified the hit to the economy, which was poised to rebound after shrinking in October to December. Goldman Sachs Group Inc. economists on Tuesday cut their forecast for economic growth to 0.7 percent for the fiscal year beginning April 1, from 1.3 percent previously.

Rolling blackouts prompted Tokyo’s businesses to keep workers at home as reduced train service made commutes difficult for the 10 million people who work in the city. Osaka’s hotels also filled as companies shifted workers out.

The space at Servcorp, a serviced-office provider, where occupancy rate stands at about 70 to 80 percent on average is now fully occupied, said Minori Nishida, a manager at Sydney-based Servcorp in Osaka.

“The whole process was just so quick — it’s obvious that companies were seeking a backup office after the earthquake,” said Nishida. “About half of new tenants that moved in after the quake have shown interests of longer-term commitment.”

David Swan, managing director of Robert Walters Japan and Korea, said that “early indicators show that hiring demand has increased slightly at regional offices outside Tokyo in areas like Kansai, Nagoya or Fukuoka.”

Mitsubishi Estate Co., Japan’s second-largest developer, has seen “a significant increase in inquiries for office space in Osaka, said Ryuichiro Funo, a spokesman at the Tokyo-based company. “Most of inquiries are from non-Japanese companies who are looking for backup offices.”

Some executives’ eyes were likely opened during the temporary shift of personnel to Osaka, said Paul Dupuis, an adviser to Osaka Mayor Kunio Hiramatsu on bringing foreign businesses into the city and the director of West Japan at Wall Street Associates KK. They “are rethinking — hey, we can have an office here. We can put a lot of our functions down here; still have a head office in Tokyo, but balance our risks.”

“No one’s made commitment yet, but you can expect that in the next few months,” Dupuis said.

KVH Co., a Tokyo-based information technology and communication service provider with about 500 people, quadrupled its staff in Osaka after the earthquake and is considering a longer-term commitment, said Satoko Furukawa, a company spokeswoman.

At the same time, Hayakawa, the BOJ’s Osaka manager, said he’s telling contacts “not to dream of another Golden Osaka.” A century ago, Osaka was Japan’s center of commerce as the industrial revolution helped it boom into a bustling textile hub. In the late 19th century, businesses began to expand out to the east to a less-crowded and cheaper Tokyo.

Tokyo has faced adversity in the past only to rebound.

Brendan Brown, chief economist at Mitsubishi UFJ Securities International PLC, said the 1923 Kanto earthquake that killed more than 140,000 people and destroyed about half of Tokyo’s economy.

After Tokyo was decimated again during World War II by B-29 raids, it rapidly rebuilt its homes, offices and roads and went on to host the 1964 Summer Olympics less than two decades after Japan surrendered to the U.S.

In 1955, greater Tokyo, a region that also encompasses three neighboring prefectures, generated 24 percent of the nation’s wealth. By 2007, the region’s gross domestic product made up a third of Japan’s economy, and was larger than India’s entire GDP and three times the size of Sweden’s.

As evidence of Tokyo’s growing importance, Sumitomo Corp., a spinoff from the Kansai-based Sumitomo zaibatsu, made both ITS Osaka and Tokyo outlets their head office in 1970. In 2001, the trading company designated its Tokyo office as its headquarters.

“There’s a very strong logic in favor of urban conglomeration because most are still doing business face to face,” said Carl Mosk, an economic historian at the University of Victoria in British Columbia. “But the fact that Tokyo is the de facto financial and economic as well as political center of Japan is a big problem. If there’s another major earthquake in Tokyo, an awful lot of the world economy is going to be profoundly affected.”

Mosk’s analysis echoes that of Takayoshi Igarashi, an aide to Prime Minister Naoto Kan, who told the prime minister at a meeting earlier in March that policymakers must focus on dispersal as they compile a rebuilding package. While Tokyo escaped the Tohoku earthquake, a “big one” that hits the capital is “going to annihilate the entire country because everything is here,” Igarashi said.